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Derivative Assets And Liabilities | 6 Months Ended
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Jun. 30, 2023
General Discussion of Derivative Instruments and Hedging Activities [Abstract] |
Derivative Assets And Liabilities | DERIVATIVE ASSETS AND LIABILITIES Commodity Price Risk We are exposed to market risks related to the volatility of commodity prices. To manage the impact of volatility from these prices, we utilize various exchange-traded and OTC commodity financial instrument contracts. These contracts consist primarily of futures, swaps and options and are recorded at fair value in our consolidated balance sheets. We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. At hedge inception, we lock in a margin by purchasing gas in the spot market or off-peak season and entering into a financial contract. Changes in the spreads between the forward natural gas prices and the physical inventory spot price result in unrealized gains or losses until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains or losses associated with these positions are realized. We use futures, swaps and options to hedge the sales price of natural gas we retain for fees in our intrastate transportation and storage segment and operational gas sales in our interstate transportation and storage segment. These contracts are not designated as hedges for accounting purposes. We use NGL and crude derivative swap contracts to hedge forecasted sales of NGL and condensate equity volumes we retain for fees in our midstream segment whereby our subsidiaries generally gather and process natural gas on behalf of producers, sell the resulting residue gas and NGL volumes at market prices and remit to producers an agreed upon percentage of the proceeds based on an index price for the residue gas and NGL. These contracts are not designated as hedges for accounting purposes. We utilize swaps, futures and other derivative instruments to mitigate the risk associated with market movements in the price of natural gas, refined products and NGLs to manage our storage facilities and the purchase and sale of purity NGL. These contracts are not designated as hedges for accounting purposes. We use futures and swaps to achieve ratable pricing of crude oil purchases, to convert certain expected refined product sales to fixed or floating prices, to lock in margins for certain refined products and to lock in the price of a portion of natural gas purchases or sales. These contracts are not designated as hedges for accounting purposes. We use financial commodity derivatives to take advantage of market opportunities in our trading activities which complement our intrastate transportation and storage segment’s operations and are netted in cost of products sold in our consolidated statements of operations. We also have trading and marketing activities related to power and natural gas in our all other segment which are also netted in cost of products sold. As a result of our trading activities and the use of derivative financial instruments in our intrastate transportation and storage segment, the degree of earnings volatility that can occur may be significant, favorably or unfavorably, from period to period. We attempt to manage this volatility through the use of daily position and profit and loss reports provided to our risk oversight committee, which includes members of senior management, and the limits and authorizations set forth in our commodity risk management policy. The following table details our outstanding commodity-related derivatives:
| June 30, 2023 |  | December 31, 2022
| Notional Volume |  | Maturity |  | Notional Volume |  | Maturity
Mark-to-Market Derivatives |  |  |  |  |  |  |
(Trading) |  |  |  |  |  |  |
Natural Gas (BBtu): |  |  |  |  |  |  |
Fixed Swaps/Futures | (233) |  |  | 2023-2024 |  | 145 |  |  | 2023
Basis Swaps IFERC/NYMEX (1) | (57,360) |  |  | 2023-2024 |  | (39,563) |  |  | 2023
Power (Megawatt): |  |  |  |  |  |  |
Forwards | — |  |  | 2023-2029 |  | — |  |  | 2023-2029
Futures | 90,935 |  |  | 2023-2025 |  | (21,384) |  |  | 2023
Options – Puts | 18,400 |  |  | 2023-2024 |  | 119,200 |  |  | 2023
Options – Calls | (124,000) |  |  | 2023-2024 |  | — |  |  | —
(Non-Trading) |  |  |  |  |  |  |
Natural Gas (BBtu): |  |  |  |  |  |  |
Basis Swaps IFERC/NYMEX | 53,123 |  |  | 2023-2025 |  | 42,440 |  |  | 2023-2024
Swing Swaps IFERC | (36,990) |  |  | 2023-2024 |  | (202,815) |  |  | 2023-2024
Fixed Swaps/Futures | (2,350) |  |  | 2023-2025 |  | (15,758) |  |  | 2023-2025
Forward Physical Contracts | (640) |  |  | 2023-2025 |  | 2,423 |  |  | 2023-2024
NGLs (MBbls) – Forwards/Swaps | (7,914) |  |  | 2023-2026 |  | 6,934 |  |  | 2023-2025
Crude (MBbls) – Forwards/Swaps | (47) |  |  | 2023-2025 |  | 795 |  |  | 2023-2024
Refined Products (MBbls) – Futures | (3,308) |  |  | 2023-2025 |  | (3,547) |  |  | 2023-2024
Fair Value Hedging Derivatives |  |  |  |  |  |  |
(Non-Trading) |  |  |  |  |  |  |
Natural Gas (BBtu): |  |  |  |  |  |  |
Basis Swaps IFERC/NYMEX | (43,435) |  |  | 2023-2024 |  | (37,448) |  |  | 2023
Fixed Swaps/Futures | (43,435) |  |  | 2023-2024 |  | (37,448) |  |  | 2023
Hedged Item – Inventory | 43,435 |  |  | 2023-2024 |  | 37,448 |  |  | 2023
(1)Includes aggregate amounts for open positions related to Houston Ship Channel, Waha Hub, NGPL TexOk, West Louisiana Zone and Henry Hub locations. Interest Rate Risk We are exposed to market risk for changes in interest rates. To maintain a cost effective capital structure, we borrow funds using a mix of fixed rate debt and variable rate debt. We also manage our interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. We also utilize forward starting interest rate swaps to lock in the rate on a portion of our anticipated debt issuances. The following table summarizes our interest rate swaps outstanding (including USAC’s), none of which were designated as hedges for accounting purposes:
Term |  | Type(1) |  | Notional Amount Outstanding
June 30, 2023 |  | December 31, 2022
Energy Transfer: |  |  |  |  |  |
July 2024(2) |  | Forward-starting to pay an average fixed rate of 3.388% and receive a floating rate |  | $ | 400 |  |  | $ | 400 |
USAC: |  |  |  |  |  |
April 2025 |  | Pay a fixed rate of 3.785% and receive a floating rate (effective April 2023) |  | 700 |  |  | — |
(1)Floating rates are based on SOFR. (2)Represents the effective date. These forward-starting swaps have terms of 30 years with a mandatory termination date the same as the effective date. Credit Risk Credit risk refers to the risk that a counterparty may default on its contractual obligations, resulting in a loss to the Partnership. Credit policies have been approved and implemented to govern the Partnership’s portfolio of counterparties with the objective of mitigating credit losses. These policies establish guidelines, controls and limits to manage credit risk within approved tolerances by mandating an appropriate evaluation of the financial condition of existing and potential counterparties, monitoring agency credit ratings, and by implementing credit practices that limit exposure according to the risk profiles of the counterparties. Furthermore, the Partnership may, at times, require collateral under certain circumstances to mitigate credit risk as necessary. The Partnership also uses industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty or affiliated group of counterparties. Our natural gas transportation and midstream revenues are derived significantly from companies that engage in exploration and production activities. In addition to oil and gas producers, the Partnership’s counterparties consist of a diverse portfolio of customers across the energy industry, including petrochemical companies, commercial and industrial end-users, municipalities, gas and electric utilities, midstream companies and independent power generators. Our overall exposure may be affected positively or negatively by macroeconomic or regulatory changes that impact our counterparties to one extent or another. Currently, management does not anticipate a material adverse effect on our financial position or results of operations as a consequence of counterparty non-performance. The Partnership has maintenance margin deposits with certain counterparties in the OTC market, primarily with independent system operators and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to us on or about the settlement date for non-exchange traded derivatives, and we exchange margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors within other current assets in the consolidated balance sheets. For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated balance sheets and recognized in net income or other comprehensive income. Derivative Summary The following table provides a summary of our derivative assets and liabilities:
|  | Fair Value of Derivative Instruments
|  | Asset Derivatives |  | Liability Derivatives
|  | June 30, 2023 |  | December 31, 2022 |  | June 30, 2023 |  | December 31, 2022
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Commodity derivatives (margin deposits) |  | $ | 35 |  |  | $ | 87 |  |  | $ | (12) |  |  | $ | (7) |
|  | 35 |  |  | 87 |  |  | (12) |  |  | (7) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Commodity derivatives (margin deposits) |  | 705 |  |  | 506 |  |  | (667) |  |  | (411) |
Commodity derivatives |  | 69 |  |  | 95 |  |  | (71) |  |  | (108) |
Interest rate derivatives |  | 13 |  |  | — |  |  | (23) |  |  | (23) |
|  | 787 |  |  | 601 |  |  | (761) |  |  | (542) |
Total derivatives |  | $ | 822 |  |  | $ | 688 |  |  | $ | (773) |  |  | $ | (549) |
The following table presents the fair value of our recognized derivative assets and liabilities on a gross basis and amounts offset on the consolidated balance sheets that are subject to enforceable master netting arrangements or similar arrangements:
|  |  |  | Asset Derivatives |  | Liability Derivatives
|  | Balance Sheet Location |  | June 30, 2023 |  | December 31, 2022 |  | June 30, 2023 |  | December 31, 2022
Derivatives without offsetting agreements |  | Derivative assets (liabilities) |  | $ | 13 |  |  | $ | — |  |  | $ | (23) |  |  | $ | (23) |
Derivatives in offsetting agreements: |  |  |  |  |  |  |  |
OTC contracts |  | Derivative assets (liabilities) |  | 69 |  |  | 95 |  |  | (71) |  |  | (108) |
Broker cleared derivative contracts |  | Other current assets (liabilities) |  | 740 |  |  | 593 |  |  | (679) |  |  | (418) |
Total gross derivatives |  | 822 |  |  | 688 |  |  | (773) |  |  | (549) |
Offsetting agreements: |  |  |  |  |  |  |  |
Counterparty netting |  | Derivative assets (liabilities) |  | (64) |  |  | (85) |  |  | 64 |  |  | 85 |
Counterparty netting |  | Other current assets (liabilities) |  | (622) |  |  | (359) |  |  | 622 |  |  | 359 |
Total net derivatives |  | $ | 136 |  |  | $ | 244 |  |  | $ | (87) |  |  | $ | (105) |
We disclose the non-exchange traded financial derivative instruments as derivative assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date. The following table summarizes the location and amounts recognized in our consolidated statements of operations with respect to our derivative financial instruments:
| Location |  | Amount of Gain (Loss) Recognized in Income on Derivatives
|  |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Commodity derivatives – Trading | Cost of products sold |  | $ | 2 |  |  | $ | 11 |  |  | $ | (10) |  |  | $ | 28 |
Commodity derivatives – Non-trading | Cost of products sold |  | (8) |  |  | (175) |  |  | 60 |  |  | (192) |
Interest rate derivatives | Gains on interest rate derivatives |  | 35 |  |  | 129 |  |  | 15 |  |  | 243 |
Total |  |  | $ | 29 |  |  | $ | (35) |  |  | $ | 65 |  |  | $ | 79 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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